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Unformatted text preview: ally turned to be NPLs. Second, many of the loans
made in the 1980s were used to support the industrial policy. Although the enterprises receiving
the loans in some cases were unprofitable under the technology they had and the prices that
prevailed, the loans were successful in terms of promoting the development and modernization
of important industries. In the 1980s, the Santana cars assembled by Shanghai-Volkswagen were
very expensive comparing with the cars made in Japan, as most of the parts were imported
from Volkswagen. However, the policy loans that were used to establish Shanghai-Volkswagen
helped to develop China’s automobile industry in the long run. Third, most of policy lending Non-Performing Loan of China’s Banking System 143 made in the 1990s was aimed to save SOEs from liquidation. In the industries like textiles, heavy
machinery, electrical equipment, mining and so on, which were traditionally dominated by SOEs,
the equipment and knowledge were twenty-five or more years out of date in the 1990s. The
products produced by these enterprises were so obsolete that their prices did not even cover
their material cost of production. This means that these SOEs should be shut down. However, the
government still supported them through policy lending since before reform the social function
of employment, income, housing, health care, children’s education and retirement pensions are
all provided by SOEs. To abandon this system and close SOEs overnight could have produced the
poverty, reduced life expectancy, despair and chaos which was experienced by the former Soviet
Union when the old planned economic system collapsed. The policy lending was consequently
used to achieve the objective of modernizing its industry as rapidly as possible while balancing
the conflicting objectives of minimizing the hardships imposed on its workers, and maximizing
the incentives or pressures to make the needed adjustments.
Therefore, the banks involved have acted primarily as government agents, disbursing funds
to a variety of pre-determined projects without any preliminary credit analyses. Such analyses
were never performed, nor was there thought to be any need for them, since all credit terms
including the amount of the loans, loan maturity, interest rates, and so forth, were pre-determined
by the government. Under the “policy lending” guidance, poor documentation for loan collateral
was common, and credit risk management skills were far from meeting international standards.
Such a system could not help but generate irrational investment decisions, and these decisions
frequently resulted in non-performing loans.
In 1994, the Chinese government established three policy banks that took over the policy
l ending tasks from the SOCBs, leaving the latter with more healthy capital to develop a
commercial lending orientation. The administration also established a legal basis for commercial
banking with the promulgation of the Commercial Banking Law in 1995. Moreover, as the
e conomic reform prog...
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This document was uploaded on 03/12/2014.
- Spring '14